Airlines Team Up To Survive

March 16, 1986|By Carol Jouzaitis, Chicago Tribune

CHICAGO — The airline industry is restructuring at such a frantic pace that even the airlines are having a tough time keeping track of who's on top.

One thing is clear, though: Size has become as crucial to survival as keeping costs under tight-fisted control. As a result, many industry analysts believe that airlines will continue gobbling each other at a fast rate, narrowing the number of nationwide carriers significantly.

''There's excess competition and capacity,'' said Morton Beyer, president of Avmark, a Washington-based aviation consulting firm. ''That's creating a bloody struggle to become larger, stronger and more dominant.''

Last month a deadlocked labor confrontation forced Eastern Air Lines to accept Texas Air Corp.'s $600 million offer to steer clear of bankruptcy court. A few days later, struggling Trans World Airlines scooped up Ozark Airlines to bolster TWA's weak domestic route system. Both purchases still must be approved by federal antitrust officials and company shareholders.

Combining Miami-based Eastern, the nation's third-largest carrier, with Texas Air's aggressive Continental Airlines and New York Air would create a low-fare empire spanning the United States and stretching as far as the Orient, South America and Europe.

Texas Air chairman Frank Lorenzo also would gain a powerful computerized reservations system capable of snaring an increased share of travel agents' bookings.

United Airlines' purchase of Pan American's extensive trans-Pacific division, completed last month but announced late last year, set the stage for bigger and bigger airlines.

Under pressure from the United announcement to retain its leading position in the Pacific, Northwest Airlines struck a merger deal in January with archrival Republic Airlines.

The federal government's approval of the United deal -- and indications that it will pose no significant obstacles to the Northwest-Republic combination -- have opened the merger floodgates.

Nationwide carriers such as USAir, Piedmont and Delta, and regionals such as Pacific Southwest, Air Cal, Midway, Horizon and America West, are viewed as prime merger bait.

''It's going to be damned difficult for the regionals to survive,'' Beyer said. Other larger carriers, such as Western and Pan Am, also are under intense pressure to combine with stronger companies because of high costs and heavy debt.

Western chairman Gerald Grinstein confirmed last week that the Salt Lake City-based carrier has had ''several potential suitors,'' though he refused to identify them. He said Western is considering various anti-takeover measures. Western's name has been linked with that of Atlanta-based Delta Air Lines, among others. Conservative Delta, the nation's fifth-largest airline and Eastern's main competitor in the Southeast, stands to be hurt the most by the Texas Air deal.

Eastern finally managed to secure money-saving contracts from its pilots and flight attendants late last month, but Texas Air's Lorenzo is expected to slice costs even lower at debt-ridden Eastern.

That would be bad news for Delta, especially at William Hartsfield Atlanta International Airport, its home hub. Delta and Eastern have an uneasy truce at Hartsfield, the nation's second-busiest airport. Together they control 90 percent of the airport's business -- Delta with 50 percent of the passenger traffic, Eastern with 40 percent.

At Orlando International Airport, Eastern is the No. 1, carrier with 25.7 percent of the passenger traffic; Delta is No. 2, with 17.5 percent.

''Delta is sitting there like a fat, contented elephant. It's going to need greater mass and lower costs, too,'' Beyer said. ''If Lorenzo were to slash Eastern's expenses as low as Continental's, Delta would have to cut its own costs by $1 billion a year to stay competitive.''

Potential buyers are not without their problems, either.

For example, AMR Corp., parent of American Airlines, is said to be interested in Pan Am's Atlantic routes. But AMR is restrained by highly restrictive clauses in its union contracts that would make it nearly impossible for the two carriers to merge.

The company, which led the industry last year with a $506.5 million operating profit, also announced last week that it expects to report a first- quarter loss, its first since 1983. It blamed the proliferation of discount fares.

Major and regional airlines number about 100 nationwide. During the next four years or so, that number will be cut by almost one-third through mergers and bankruptcies, said George James, president of Airline Economics Inc., a Washington-based research concern.

When the dust settles, James said, ''the industry will be down to six or eight major carriers.''